By George Gilligan, UNSW

SYDNEY: 28 July - On 27 May 2014 a high profile conference took place at The Mansion House and Guildhall in London.  Its theme was Building Value and Renewing Trust and it was organised by the Inclusive Capitalism Initiative.  The panels that formed the core of the conference’s activities were: ‘The social responsibility of business is to increase its profits’ (a famous maxim of monetarist economist Milton Friedman); What can businesses do to facilitate a shift to a values and purpose-led approach?; How labour, management and capital can work together to increase the benefits of capitalism; The role of innovation in boosting growth and opportunity; Which type of capitalism works best to build economic and social value?; How can corporate CEOs drive the long-term agenda? and How can large institutional investors and asset managers drive the long-term agenda?  These issues which are not unusual fare at business and management conferences were discussed by prominent academics, journalist, business leaders and a smattering of parliamentarians.  However, unusually perhaps there were a number of extremely high profile keynote speakers including: His Royal Highness Prince Charles the Prince of Wales; Bill Clinton, the 42^nd President of the United States; Christine Lagarde, Managing Director of the International Monetary Fund; and Mark Carney, Governor of the Bank of England and Chair of the Financial Stability Board (FSB).  Also the amalgam of hosts and organisers included some financial sector heavy hitters: the City of London; E.L. Rothschild; the Inclusive Capitalism Initiative; the Financial Times; and Edelman.  So, what is inclusive capitalism?  What is its significance, if any?  And will the 27 May conference have any substantial legacy effects?

In her speech to the conference, Christine Lagarde considered the historical origins of the term capitalism itself: ‘Capitalism originates from the Latin “caput”, cattle heads, and refers to possessions. Capital is used in the 12^th century and designates the use of funds. The term “capitalism” is only used for the first time in 1854 by an Englishman, the novelist William Thackeray—and he simply meant private ownership of money.’  Mark Carney noted in his speech to the 27 May conference that: ‘Inclusive capitalism is fundamentally about delivering a basic social contract comprised of relative equality of outcomes; equality of opportunity; and fairness across generations. Different societies will place different weights on these elements but few would omit any of them.’

So equality, fairness and a sense of social contract seem to be structural features of inclusive capitalism but to date a universally accepted definition of the term does not seem to have emerged.  The ubiquitous Wikipedia states that: ‘inclusive capitalism is a term composed of two complementary meanings: (1) poverty is a significant, systemic problem in countries which have already embraced or are transitioning towards capitalistic economies, and (2) companies and non-governmental organizations can sell goods and services to low-income people, which may lead to targeted poverty alleviation strategies, including improving people’s nutrition, health care, education, employment and environment, but not their political power’.  This last point about inclusive capitalism being a strategy for incrementally increasing the material wealth of the mass of consumers, without necessarily empowering them, is an issue which fanned criticism, indeed ridicule, of the 27 May conference in some quarters, and it is discussed in more detail below.  The term inclusive capitalism itself, appears to have been first been used in 2005 by University of Michigan Professor of Business, C.K. Prahalad, when he discussed the potential for eradicating poverty through business profit making.

What has really propelled the high media profile of the inclusive capitalism concept in recent years has been its adoption since 2011 by the Henry Jackson Society, a conservative think tank established in Cambridge UK in 2005 and named after US Senator Henry M. Jackson, who represented the State of Washington from 1953-1983.  The Henry Jackson Initiative for Inclusive Capitalism developed into the Task Force for Inclusive Capitalism and in May 2012 it published Towards a More Inclusive Capitalism.  Following its publication later in 2012, The Inclusive Capitalism Initiative was established: ‘..as the legacy vehicle of the Task Force for Inclusive Capitalism’.  The Inclusive Capitalism Initiative describes itself as: ‘..a non-profit organisation that seeks practical ways to renew capitalism to make it an engine of economic opportunity and shared prosperity through the adoption of inclusive business practices…and  Towards a More Inclusive Capitalism the founding blueprint for the Initiative’.

The opening sentence of Towards a More Inclusive Capitalism describes capitalism as ‘very much under siege’ and so sets out what it terms ‘the case for capitalism’.  The study argues that: ‘…capitalism has made the world healthier, richer and freer than previous generations could have imagined…At the same time, we recognize the serious dislocations caused by developments in the capitalism of the last 30 years—developments exacerbated by the recent crisis: Several million manufacturing jobs have moved to developing countries where labor is cheaper…Youth unemployment is unacceptably high…- Income inequality has radically increased over the last 30 years in the U.S. and the U.K.  Market pressure and compensation structures led managements to focus more sharply on short-term profits than on the long-term requirements of their businesses.’

It remains a moot point despite the efforts of protest movements in many countries such as Occupy Wall Street, Occupy Berlin or Occupy Sydney as to just how much capitalism is under siege, although there is deep widespread popular resentment in many countries towards the finance sector in general and bankers in particular, rather than capitalism per se.  Regardless, those who wrote Towards a More Inclusive Capitalism certainly feel under siege and state that: ‘The three crucial areas we have identified in which companies and institutions can make, and are making, positive progress are (a) education for employment, (b) support for small and medium-sized enterprises (SMEs), and (c) improvements in corporate management and governance for the long term…. We believe large companies can help SMEs without making any significant compromises to their own profitability. For this to happen, however, they must mentor SMEs in working more successfully as suppliers to large companies.  Today’s focus on short-term performance must be replaced by long-term thinking on everybody’s part.  Companies need not offer quarterly earnings guidance. They should seek ways to reward investors who hold their shares for the long term.’

The warnings about short-termism are echoed in many quarters but again there is a sense of sustaining the status quo and power issues in the quote above such as ‘…must mentor SMEs in working more successfully as suppliers to large companies.’  Co-host of the conference was Lady Lynn Forester de Rothschild, wife of Sir Evelyn de Robert Rothschild, member of the famous Rothschild banking dynasty that is one of the wealthiest families in the world.  For better or worse it is the involvement of Lady de Rothschild that in part has prompted scorn about the 27 May conference from some commentators.  For example Pam Martens in a piece entitled: Try to Contain Your Laughter: Prince Charles and Lady de Rothschild Team Up to Talk About ‘Inclusive Capitalism’: ‘The lurking undertone of the conference was not so much a noblesse oblige gesture to spread the wealth as it was an effort to address the growing anxiety among the well-heeled that if they don’t step up their PR game, government and/or a populist revolution is going to take the reins – and possibly their heads.’

Similarly Ahmed who views The Inclusive Capitalism Initiative as a Trojan Horse to quell what he sees as a potential global revolt against the established orders of capitalism: ‘Central to the proceedings was an undercurrent of elite fear that the increasing disenfranchisement of the vast majority of the planetary population under decades of capitalist business-as-usual could well be its own undoing.’  Martens and Ahmed may or may not be correct in their suspicions about The Inclusive Capitalism Initiative.  Certainly Lady Forester de Rothschild is worried, stating in an interview with Bloomberg prior to the conference that inclusive capitalism no longer exists, has become ‘an oxymoron’ and that: ‘It is really dangerous when business is viewed as one of society's problems.’ 

Some of Lady de Rothschild’s concerns were echoed at the conference by Christine Lagarde, Managing Director of the International Monetary Fund: ‘The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population– that is 3.5 billion people….In the decade prior to the crisis, the balance sheets of the world’s largest banks increased by two to four-fold…. This kind of capitalism was more extractive than inclusive.’  As Ms Lagarde notes one of the major casualties of this type of extractive capitalism has been community trust in both business and political leaders and she cites the findings of the 2014 poll undertaken by the Edelman Trust Barometer: ‘..less than a fifth of those surveyed believed that governments or business leaders would tell the truth on an important issue…This is a wakeup call. Trust is the lifeblood of the modern business economy. Yet, in a world that is more networked than ever, trust is harder to earn and easier to lose….In this age of diminished trust, it is the financial sector that takes last place in opinion surveys. ..As many have pointed out, the very word credit derives from the Latin word for trust.  We are all familiar with the factors behind the crisis—a financial sector that nearly collapsed because of excess. A sector that, like Icarus, in its hubris flew too close to the sun, and then fell back to earth—taking the global economy down with it.’

As Ms Lagarde eloquently observes, it is gross inequalities of wealth distribution, compounded as seen in the global financial crisis by excessive risk-taking, abdication of moral hazard and short-termism within the financial sector in particular, that can cause a systemic loss of trust in the broader structures and processes of capitalism.  These are the threats that prompted the Inclusive Capitalism Initiative conference.  Ms Lagarde’s views found support with one of the world’s most influential financial regulators, Mark Carney, Governor of the Bank of England and Chairman of the G20’s Financial Stability Board.  In his speech to the 27 May conference Mr Carney discussed the problems associated with the growing exclusivity of capitalism, the need for financial reform and the rebuilding of social capital, allied with a building of a sense of vocation and responsibility in business.  Such initiatives were necessary in order to ensure dynamic sustainable markets, long-term perspectives, fairness, the generation of trust and an engaged citizenry.  Mr Carney freely admitted that his: ‘..core point is that, just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.  To counteract this tendency, individuals and their firms must have a sense of their responsibilities for the broader system.’

Mr Carney’s comments reflect a similar view expressed by my colleagues Justin O’Brien, Seumas Miller and myself when writing about embedding restraint with stability in the regulation of the finance sector. Sustainable systemic stability requires integrating increased levels of professionalism with notions that the privilege of participation as a business actor carries with it obligation to the broader community and that this: ‘…should not be viewed as an impossible challenge because for all organisations there should be a rational symbiosis between sensible commercial strategies, notions of individual and corporate ethical responsibility, and statutory legal obligations.’  If one sets aside conspiratorial evaluations of inclusive capitalism about whether it may or may not be a placatory siege response, this in essence is its promise.  It presents as an opportunity for business interests (including the finance sector) and the communities from which they derive their profits to rebuild the social contract between them through a rebalancing of privilege and obligation on more sustainable pathways.